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Author: roland465 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5074  
Subject: Am I on track? Date: 1/4/2008 2:25 AM
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Currently I have a total net worth of 80k and zero debt with no mortgage. I rent and have no immediate plans to buy a house.

The 80k breaks down roughly as follows:
43.5k Retirement Acct
14.5k General Stock account
15.5k E-Fund
4k Future trip fund (unplanned)
2.5k bank acct

I'm 32 and single. I sock away about 6k in the retirement account each year and save another bit which is spread around the remaining accounts. Figure at least 1-2k per account.

I'd like to be completely independent in 20-25 years.

Thoughts and comments are welcome.
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Author: whyohwhyoh Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4541 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 11:06 AM
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I'd say your way ahead of the average folks, but I'd look into increasing your savings each year. Assuming $9k in savings and 8% growth rate you are looking at around $1,000,000 in 23 years, in todays dollars. Will be less with inflation.

Without a home paid off, $1,000,000 will be tough to retire on at age 55, but possible. Depends where you want to retire, and what standard of living you are looking for.

--
whyohwhyoh

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Author: math999man Big red star, 1000 posts Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4542 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 12:31 PM
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Using the formula from the book - The Millionaire Next Door" where it is give by:

The authors developed a formula for the amount of wealth a financially successful person accumulates as a function of their age and income. They had a complicated regression model, but it summarises nicely into:

Multiply your age by your gross annual income from all sources except inheritances. Divide this by ten. This, less any inherited wealth is what your net worth (excluding home equity) should be.

The authors went on to classify two extremes of wealth accumulator

A prodigious accumulator of wealth (called a PAW throughout the book) has a net worth twice as high as this formula.
An under accumulator of wealth (UAW) has a net worth under half of this. In between is the AAW (average accumulator of wealth), which is your ordinary garden variety rich guy.


Reference - http://www.travismorien.com/FAQ/thrift/millionaire.htm

How do you compare with the formula given above ?

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Author: 4inthefamily Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4543 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 12:52 PM
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How do you compare with the formula given above ?

I know this has been discussed a hundred times before on various boards, but I had to bring it up again. That formula is too simplistic to mean much. For one, such as myself and the OP, who is 32 years old - I would consider it quite prodigious to even have 3.2 times our household income - certainly above average. On the other hand, I hope and pray that by the time I am 60, I have significantly more than 6 times my salary. Otherwise, retirement might look quite bleak.

The authors of the book tried to fit a linear graph to what is an exponential function. It works okay for the middle numbers, but does a terrible job on the ends - those at the beginning of their careers and those at the end. According to the formula, my little sister, who graduated from college last April should have (2.4 * $56,000) since she is 24 and has an annual salary of $56,000. Kind of silly when you think of it that way.

-4

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4544 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 12:57 PM
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How do you compare with the formula given above ?

I know this has been discussed a hundred times before on various boards, but I had to bring it up again. That formula is too simplistic to mean much. For one, such as myself and the OP, who is 32 years old - I would consider it quite prodigious to even have 3.2 times our household income - certainly above average. On the other hand, I hope and pray that by the time I am 60, I have significantly more than 6 times my salary. Otherwise, retirement might look quite bleak.

The authors of the book tried to fit a linear graph to what is an exponential function. It works okay for the middle numbers, but does a terrible job on the ends - those at the beginning of their careers and those at the end. According to the formula, my little sister, who graduated from college last April should have (2.4 * $56,000) since she is 24 and has an annual salary of $56,000. Kind of silly when you think of it that way.

-4


I agree. A better comparison would be to see net worth percentiles by age. And of course the more important measure is to compare yourself to the progress you need to reach your goals.

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Author: FoolNBlue Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4545 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 6:57 PM
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I agree. A better comparison would be to see net worth percentiles by age. And of course the more important measure is to compare yourself to the progress you need to reach your goals.

I agree with MadCapitalist, and dissagree with MadCapitalist, and then I agree with him again. I agree with his agreement. I dissagree with the percentile statement as it is irrelevant to the question*. I fully agree with his statement that you should measure yourself to your goals.

*I dissagree because the question asked was "am I on the right track." Comparing yourself to others is meaningless. Comparing yourself to the "general population" is even more meaningless. I intentionally do not compare myself to others (though, I do look at dispersion statistics and am pleased that I am always in the top category... however, being in the top category has no effect on my ability to achieve FIRE). It may make you feel good about your progress (and you should) but you shouldn't feel good because you are "better" than someone else with different goals/priorities.

The Millionaire Next Door formulas are silly. I am 33. I have a NW equal to about 3.8 times my annual income. Much more important to me is my NW relative to my annual expenses (approx 11 times my approximate 2007 actual expenses). FIRE is all about the ratio of Net Worth to Expenses. If the ratio is right (open to much debate, I use 33x since I plan to pull the plug young but think 25X is probably adequate and use it when feeling optimistic).

I think watching your expenses is much, much more important than comparing your income to your savings if FIRE is your #1 goal. A dollar of annual savings is worth between $25-$33 of annual income to me when calculating withdrawal rates.

Good Luck, stick around (and check out the Retire Early CampFIRE too -just be prepared to sift through a lot of off-topic but, IMO, worthwhile, off-topic stuff).

FoolNBlue (Would rather compare himself to you guys... hum, poll idea???) Oh yeah, I almost forgot, vote for this guy: www.ronpaul2008.com

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4546 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 7:52 PM
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I agree. A better comparison would be to see net worth percentiles by age. And of course the more important measure is to compare yourself to the progress you need to reach your goals.

I agree with MadCapitalist, and dissagree with MadCapitalist, and then I agree with him again. I agree with his agreement. I dissagree with the percentile statement as it is irrelevant to the question*. I fully agree with his statement that you should measure yourself to your goals.


You misunderstood me. As I remember it, the Millionaire Next Door formula is supposed to tell you if you are an Under Accumulator of Wealth (UAW), an Average Accumulator of Wealth (AAW), or a Prodigious Accumulator of Wealth (PAW). These three categories are based on comparisons with others. Looking at the percentiles would give you a better understanding of where you stand in comparison to others than the Millionaire Next Door formula, which appears to be extremely weak in this regard. However, it would still be of very limited usefulness in determining whether you are "on track."

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Author: FoolNBlue Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4547 of 5074
Subject: Re: Am I on track? Date: 1/4/2008 8:20 PM
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You misunderstood me.

No need to defend yourself. You definitely make the "A list" of people I'd like to meet! (Don't bother telling me where I may rank on your list -my fragile ego couldn't handle it)

My point was that comparing yourself to others is irrelevant with respect to how close you are to FIRE. Comparison can certainly be a morale booster and I think most people, for better or worse, compare themselves but shouldn't put that much emphasis on it. A trustfund playboy may have tons of wealth relative to no/low income but could still be very far from financial independence. I manage my personal life (and professional life where I have influence) based off of 3 key questions: Where am I? Where do I want to be? What do I need to do to get there? Where anyone else is is irrelevant (other than possible influence over me they may have).

I enjoyed TMND as easy reading but laughed at the limitations of the formula from day one (I read it just out of college with miniscule net worth compared to my rapidly increasing income). Even now, I doubt it applies much even though I'm 10 years out of college and my income growth has slowed dramatically.

FoolNBlue (Fire Wannabee and www.ronpaul2008.com supporter)

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4548 of 5074
Subject: Re: Am I on track? Date: 1/5/2008 6:42 PM
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I like Intercst's Retire Early Home page.
http://www.retireearlyhomepage.com/

I think this page is the one with the link to the calculator that figures out how much longer until you can retire. You can play around with the various inputs. There is even a graph that shows net worth crossing your required retirement stash!
http://www.retireearlyhomepage.com/software.html

Vickifool

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4569 of 5074
Subject: Re: Am I on track? Date: 2/4/2008 8:13 PM
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I sock away about 6k in the retirement account each year

Since we don't know your income, it's hard to say if this is sufficient. I've heard many advise that in your 20's you should be saving 10% of your annual income, and that percentage should rise as the years go by. So, perhaps by 32, it should be about 12%, or even higher.

As to whether you'll have enough to be completely independent in 20-25 years, there are so many factors involved, it's impossible to predict. But, I would be thinking about the following possible scenarios:

What would happen if you met the man/woman of your dreams?

And you decided to marry and have children?

And then you decided you needed to buy a house to house the children?

The 80K you have now wouldn't be enough to put a down-payment on a house in most areas--and consider that less than half of that is outside of your retirement account.

Even if you don't marry, etc., it never hurts to save as much as you can--by that I mean at least 15% of your gross income.

Just my 2 cents,

2old

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4571 of 5074
Subject: Re: Am I on track? Date: 2/4/2008 8:38 PM
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The 80K you have now wouldn't be enough to put a down-payment on a house in most areas--and consider that less than half of that is outside of your retirement account.

I'm not sure where you're getting your data on house prices, but assuming a 20% downpayment, $80k would be enough for a downpayment on a $400k house. The national median price (half higher, half lower) in Q3 2007 (Q4 figures not yet published) was $224,900. (http://www.realtor.org/press_room/news_releases/2006/mhp_2006q3_sales_confirm_market_transition.html)

And prices are dropping. Even $40k should be able to provide a 20% downpayment to buy nearly half of the homes in the US.

AJ

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